July 31, 2009 6:09 pm

Ambitious green targets boost renewable energy

The future is looking greener for investors as ambitious government targets for generating renewable energy are providing fund managers with new opportunities.

More than 30 per cent of the UK’s electricity could eventually be derived from renewable sources, according to the latest estimates, compared with just 5.5 per cent today. This would be twice the government’s legally-binding target of 15 per cent by 2020.

Much of this is expected to come from wind power but other sources, including biomass and tidal power, will also increasingly be drawn upon. The government plans to invest £100bn in the renewable energy sector, which could involve the creation of as many as 500,000 jobs. It has also set out new plans for reducing carbon emissions to help tackle climate change.

Fund managers say this increased commitment, together with a similar focus from the US, plus stronger moves towards clean energy from China, is welcome news for an industry that has been slow to take off – and has suffered more than others in the recent downturn.

Edward Guinness, one of the managers of Guinness Asset Management’s Alternative Energy Fund, says green energy companies were trading at a premium to the market before the downturn but were hit hard last year, particularly as funding dried up.

His fund lost 40 per cent in the year to the end of June, according to total return figures from Lipper.

A number of other renewable energy funds, most of which have been set up in the past couple of years, have had an equally difficult run. Lipper’s rankings show that, over the same period, BlackRock’s New Energy Investment Trust, the Premier Renewable Energy trust and the Jupiter Green Investment Trust all saw negative returns of at least 30 per cent.

But new opportunities now look to be arising, particularly in wind power .

“The area where government policy is really having an impact on our investing is on the wind side,” says Guinness. “The UK has much better resources in this area than in solar, and the government wants to make it easier to get planning permission.”

His fund typically invests in companies that derive at least 50 per cent of their business from either the manufacture and development of renewable energy generation or the improvement of energy efficiency.

Guinness says solar stocks performed well last month as demand started to pick up following a difficult 18 months, in which the prices for solar panels halved. The lower prices should trigger stronger growth, he says, while providers should also receive a boost from cheaper raw materials, lower manufacturing costs and improved subsidies.

Luciano Diana, portfolio manager of the Pictet Clean Energy fund, says wind power is more attractive than solar because it is much cheaper. He claims that, for the first time, there is a real push to new energy around the world.

“For a long time, it has just been Europe supporting it but now there is a big push from the US and also Chinese packages dedicated to cleaner energy,” he says.

Fund managers say much of the new government investment will be captured by the large utilities.

The Association of Investment Companies argues that moves to combat climate change should prove beneficial to some of the big utility and infrastructure investment companies.

John Murray, chairman of Ecofin, which invests in the utility and infrastructure sectors, says utilities have been largely oversold in recent months as investors have moved back into cyclical and recovery stocks. As a result, some companies in the sector are looking the cheapest they have been since 2003.

But, he points out: “Unlike in 2003, the fundamentals of the global utility sector are generally sound. Balance sheets are in relatively good shape and the utilities are proving that they are able to access long-term capital markets.” 

Andrew Whalley, manager of the Premier Renewable Energy trust, recognises the momentum behind addressing climate change. “The [utilities] sector looks undervalued and is a defensive haven at this stage, but with opportunities for growth as the global economy picks up,” he says.

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